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Beware Of Short Sales
Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.
The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
June 23, 2007 in Dealing With Creditors | Permalink
Comments
Sharon according to jimbo's link to the IRS if it was an income producing investment property you should be able to offset the capital loss with the imputed income.
Posted by: lui | Apr 30, 2009 11:19:56 PM
The laws have definately changed some in regards to the debt foregiveness and taxability if it is your primairy. Lenders are also much more likely to no seek a deficiency repayment lately it seems.
Posted by: Short Sale Realtor | Apr 19, 2009 11:55:13 PM
State: Florida.
My short sale was approved. WaMu sent me the demand letter and they included a sentence: “WaMu reserves the right to pursue collection of the remaining balance due on the promissory note for loan number XXXXXXX” which is my HELOC. After talking to a lot of people at WaMu and explaining my specific situation all the way to VP level, they agreed to remove this wording from my demand letter and they removed it. I have the new Demand letter 03/18/09) expect to close on 03/31/09.
Is this enough for me to feel free from them trying to collect after the sale?
… or will they still have that right even if they don’t put it in the Demand Letter?
... this is my homestead home (primary residence).
... If they still have the right to try and collect, for how long can they attempt it?
... what can I do to prevet them from comming after me after the sale?
Thanks
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Posted by: bamkruptcy lawyersservices | Feb 7, 2009 6:30:17 AM
IMPORTANT CHANGES TO THE LAW CHANGE THESE ANSWERS!!!!
The answers here just prove the point that you must consult very competent and timely legal and tax counsel to get the correct information. Some of these answers were right at one point in time and are now dead wrong.
The Mortgage Debt Relief Act of 2007 provides 5 situations in which the discharge of mortgage debt will *not* incur any tax liability.
http://www.irs.gov/irs/article/0,,id=179073,00.html
Form 982 is used to show the IRS that you fit one of these categories. Then, even if you receive a 1099 from your mortgage lender, the amount may be excluded from income, and hence no tax owed.
Posted by: Jimbo | Nov 19, 2008 9:14:16 AM
my husband put his name on a investment property for his son.. son can not make payments,so it is all on my husband and he is 86 and on fixed income.. so property is being sold as short sell with the fear of a 1099 , owing money to IRS WE DON'T HAVE..
WHAT SHOULD WE DO.. let it forclose,file bankruptcy.. i don't want to make a HUGE mistake.. the realestate agent is making 14,000. On short sell.. buyer is getting property
cheep ,the son has not a care in the world.. so we are left holding the bag..
what should we do.. thank you for any advice,sharon
Posted by: sharon | Nov 11, 2008 8:57:35 PM
I am in HUGE trouble. I was an investor and was doing well until I went in with a partner on a 96 unit hotel. He took me for everything and is in jail now, however I am foreclosing on 2 properties, have no job, no money left and now I'm afraid to file bankruptcy for fear that I will still owe money after I'm done. I do not even know who to talk to because I have no money to pay no JOB and I have a new baby. If anyone can give me some advice. I just was served with papers for foreclosure on my home. I am looking for a job in the mean time if you can help me sift through this I would appreciate it. My attorney I feel is just looking for his fee.
Posted by: Mat | Sep 17, 2008 12:44:17 PM
Am I wrong here or has the law changed on this matter? I thought the could no longer send a 1099.
Posted by: Orlando Real Estate | Jan 14, 2008 11:37:27 PM
Lawyer's are Idiots! They want people to foreclose- they make $40-$50,000.00 on a foreclosure. So of course they are going to advise you to go ahead and go into foreclosure. Foreclosure will cost you more than a few thousand dollars in tax money. Anyone selling a property as a "short sale"- should not expect to get out scott free. Just run the numbers and see the bottom line.
Posted by: Russ | Jan 8, 2008 4:45:29 PM
Short sales are looking even better right now. I noticed the inventory is raising locally. Might be a good thing for investors.
Posted by: Foreclosures Eugene | Jan 1, 2008 9:16:46 AM
